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Lawsuits against pharmaceutical companies generally center on product-liability claims. A new trend in pharma cases, however, is to include a different kind of claim: a claim for unfair trade practices.

A recent decision from the South Carolina Supreme Court addresses unfair-trade-practices claims against a pharma company. In State ex rel. Wilson v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., the South Carolina Supreme Court held that representations about the drug Risperdal by Janssen Pharmaceuticals (a Johnson & Johnson subsidiary) violated South Carolina’s analogue to N.C. Gen. Stat. § 75-1.1. Applying that South Carolina statute, the court sustained a 136-million-dollar award against Janssen.

This post reviews that decision—one that reveals the potency of unfair-trade-practices doctrine.

The Facts of Ortho-McNeil-Janssen

The market for antipsychotic drugs has been intensely competitive since at least the 1990s, when Risperdal first became available in the United States.

Shortly after Risperdal became available, a Janssen competitor began marketing another antipsychotic drug, Zyprexa. Janssen developed a marketing strategy to distinguish Risperdal from Zyprexa. In particular, Janssen allegedly promoted Risperdal as involving a lower risk of weight gain than Zyprexa did, even though an earlier study showed that Risperdal itself posed a serious risk of weight gain. Likewise, Janssen allegedly did not disclose a study that showed that Risperdal patients develop diabetes at a higher rate than Zyprexa patients do.

As the side effects of antipsychotic drugs became more widely recognized, the FDA required that drug companies disclose certain side effects of these drugs. Allegedly to “soften the blow” to its market share, Janssen issued a “dear doctor” letter to prescribers of Risperdal. This letter did not include the full text of the new warning label. Instead, it stated, among other things, that Risperdal was not associated with certain health conditions.

In 2004, the FDA cautioned Janssen that it considered the “dear doctor” letter false or misleading. In addition, the FDA told Janssen that the warning label for Risperdal did not comply with FDA regulations.

In response to these facts, South Carolina’s attorney general sued Janssen for violations of the South Carolina Unfair Trade Practices Act. After a jury trial in which private lawyers from Texas represented the state, the state recovered $327 million in civil penalties.

Janssen appealed this judgment. The state supreme court heard oral arguments in 2013. Nearly two years later, the supreme court issued its much-anticipated decision.

No Actual-Injury Requirement for a State Plaintiff

In the South Carolina Supreme Court, Janssen argued that the state’s unfair-trade-practices claims failed as a matter of law, because the state had not shown that any unfair or deceptive conduct had an adverse impact within the state.

The supreme court disagreed. It held that in South Carolina, only private plaintiffs have to show an actual injury in an unfair-trade-practices claim. The state had the burden to show that Janssen’s statements had atendency to deceive, but it did not have to show that any readers changed their behavior based on these statements.

The court called Janssen’s absence-of-injury argument “nothing more than an ‘if we lied, nobody fell for it’ defense.” Rejecting that defense, the supreme court held that the state’s unfair-trade-practices claims were viable despite the lack of a showing of actual injury.

A Reduced Judgment

Even so, the lack of an actual injury (as well as limitations concerns) led the court to reduce the trial court’s judgment by almost sixty percent.

First, the supreme court reduced the labeling-based penalties against Janssen. The trial court had assessed a $300 civil penalty for each “sample box” that Janssen sent to Risperdal prescribers from 1998 to 2007. Because of South Carolina’s three-year statute of limitations for unfair-trade-practices claims, the supreme court reversed the penalties for conduct that occurred before 2004. Further, “based on the totality of the circumstances,” including the absence of a concrete injury to the public, the supreme court reduced the penalty for the remaining labeling violations from $300 per violation to $100 per violation.

Second, the court reduced the penalties in connection with sales calls that followed up on the “dear doctor” letter. The trial court had assessed a $4000 penalty against Janssen for each follow-up call. Because the supreme court found that many of the follow-up calls involved the same doctors, it reduced this penalty to $2000 per call.

The supreme court explained that it reduced these penalties because of “the absence of significant actual harm resulting from Janssen’s deceptive conduct.” For example, the court found that Janssen’s conduct had a minimal effect on prescribing physicians. It also noted that “[t]he truth about the risks associated with atypical antipsychotics was well known, particularly in the pharmaceutical and medical professions.”

For these reasons, the state supreme court remitted the total civil penalties against Janssen from $327 million to $136 million.

Federal Preemption

The South Carolina Supreme Court also rejected Janssen’s preemption arguments.

First, Janssen argued that the state’s claims about the “dear doctor” letter were preempted because they were based solely on violations of the federal Food, Drug, and Cosmetic Act. The federal act has no private right of action.

The court disagreed. It explained that although these claims were partly based on the FDA’s 2004 warning letter that called Janssen’s “dear doctor” letter false and misleading under the federal act, the state was not proceeding on a per se theory alone. That is, violations of the federal act were not the only basis for the state’s claims of unfairness and deception.

Second, Janssen argued that federal law preempted the state’s labeling-related claims as well. Janssen argued that the state was trying to impose labeling requirements that differed from those chosen by the FDA. This preemption argument likewise failed. The court relied on Wyeth v. Levine, in which the U.S. Supreme Court described FDA labeling standards as “a floor upon which States could build.”

Implications

Ortho-McNeil-Janssen is one of the first decisions nationwide to address the merits of an unfair-trade-practices claim that is based on pharmaceutical marketing.

There was a recent near miss, for example, when the Arkansas Supreme Court reversed and remanded a 1.2-billion-dollar judgment against Janssen. This reversal was not based on the merits of the unfair-trade-practices claims and other claims in that case. Instead, the Arkansas court held that a warning letter issued by the FDA in response to Janssen’s “dear doctor” letter was inadmissible hearsay and was unfairly prejudicial, so the court remanded the case for a new trial.

It remains to be seen whether the South Carolina Supreme Court’s reasoning in Ortho-McNeil-Janssen will spread to other states. However, in view of the nine- and ten-figure judgments that plaintiffs have racked up in these cases, pharmaceutical manufacturers are surely preparing to avoid these cases or defend them effectively.

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